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03 Feb 2021 | 10:04

UK services activity falls at fastest pace in 8 months

(Sharecast News) - The UK's services sector suffered the sharpest decline in business activity in January in eight months, but the rollout of Covid-19 vaccines helped to lift optimism to its highest since May 2014, according to a survey released on Wednesday. The IHS Markit/CIPS purchasing managers' index for the sector fell to 39.5 from 49.4 in December, as the third national lockdown took its toll, weighing on the travel, leisure and hospitality businesses. Still, the index came in above the consensus and flash estimate of 38.8.

Survey respondents also pointed to cautious spending patterns among clients and renewed delays to projects due to the pandemic.

On the upside, however, around 60% of survey respondents said they expect a rise in business activity over the next 12 months, compared to just 13% predicting a decline. This was attributed in part to "swift progress" in the UK vaccine rollout, providing hope of a timely return to growth and the release of pent up demand in 2021.

Tim Moore, economics director at IHS Markit, said: "Service providers experienced a steep downturn in business activity due to the third national lockdown in January, although the speed of decline remains much slower than last spring. Tight restrictions on travel, leisure and hospitality resulted in severely reduced trading among customer-facing businesses.

"Temporary closures led to shrinking demand for business services and a ripple effect of corporate spending cutbacks. As a result, total new work fell at the fastest pace since May 2020 and this setback contributed to a steeper rate of job shedding at the start of the year."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said optimism about the next year is "warranted", given the UK's vaccination programme is proceeding speedily.

"We're not convinced that households will spend a high proportion of the savings that they have amassed over the last year, but spending will rebound sharply anyway as households stop saving so much of their current income," he said.

"Admittedly, a major mutation of the virus, rendering current vaccines far less effective, would prevent the economy from recovering meaningfully, but we see no reason to make that scenario the base case. Accordingly, we think that GDP will have recovered to be just 2% or so below its pre-Covid peak at the end of this year, a huge improvement on the likely 12% shortfall in January."
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